Investing in Your 20s and 30s: Sidestep Common Minefields

Shares of stock, which represent fractional ownership in companies, offer a way for people of all economic means to invest in companies and build wealth. History shows that long-term investors can win in the stock market because it appreciates over the years. That said, some people who remain active in the market over many years manage to lose some money because of easily avoidable mistakes.

You can greatly increase your chances of investing success and earning higher returns if you avoid the following common stock investing mistakes:

Broker conflicts: Some investors make the mistake of investing in individual stocks through a broker who earns commissions. The standard pitch of these firms and their brokers is that they maintain research departments that monitor and report on stocks. Their brokers use this research to tell you when to buy, sell, or hold. It sounds good in theory, but this system has significant problems. Many brokerage firms happen to be in another business that creates enormous conflicts of interest in producing objective company reviews. These investment firms also solicit companies to help them sell new stock and bond issues. To gain this business, the brokerage firms need to demonstrate enthusiasm and optimism for the company’s future prospects. Studies of brokerage firms’ stock ratings have shown that from a predictive perspective, most of their research is barely worth the cost of the paper that it’s printed on.

Short-term trading: Unfortunately (for themselves), some investors track their stock investments closely and believe that they need to sell after short holding periods — months, weeks, or even days. With the growth of Internet and computerized trading, such shortsightedness has taken a turn for the worse as more investors now engage in a foolish process known as day trading, in which they buy and sell a stock within the same day! Whether you hold a stock for only a few hours or a few months, you’re not investing; you’re gambling. Specifically, the numerous drawbacks to short-term trading include higher trading costs, more taxes and tax headaches, lower returns from being out of the market when it moves up, and inordinate amounts of time spent researching and monitoring your investments.

Following gurus: It’s tempting to wish that you could consult a guru who could foresee an impending major decline and get you out of an investment before it tanks. Nearly all these folks significantly misrepresent their past predictions and recommendations. Also, the few who made some halfway-decent predictions in the recent short term had poor or unremarkable longer-term track records. As you develop your investment portfolio, take a level of risk and aggressiveness with which you’re comfortable. No pundit has a working crystal ball that can tell you what’s going to happen with the economy and financial markets in the future.